Lecture 7 - Time Driven ABC

Question 1

How do you collect the information required?

Answer 1

Identify distinct cost pools

Interviews

Observation

Process Maps

Question 2

How to use ABC costing based on customers?

Answer 2

Change the behaviour of customers to create a win win.

• Supermarket (no bargaining power) – Lots of low volume orders (no need for storage)
  
  • Drives deliveries.
• Look for different cost drivers

E.g. sales visits (driver is number of visits, but better driver is time spent)

Question 3

What is time driven ABC?

Answer 3

Time is the primary cost driver.

e.g. time taken to perform an activity

Assumes time is a good indicator of resource consumption.

Differentiates between theoretical and practical capacity.

Standardised: Cost per time unit of capacity

Flexible.

Primary questions are:

1. how much does it cost per unit of time?
2. how much of the per unit of time does the activity/cost pool use?

Question 4

Time driven vs conventional ABC

Answer 4

Question 5

Define the difference between theoretical vs practical capacity is.

Answer 5

Theoretical capacity is the maximum capacity that theoretically an employee can fulfil.

Practical capacity is the realistic expectation of how many ‘productive’ time hours are available.

e.g. on average 20% of time lost to non-work specific activities on a 8hour work day.

• Theoretical is 8 hours
• Practical is a 6.4 hour work day.

Not focus on redundant or sunk time.

Question 6

Merits of TDABC compared to ABC or pre-ABC

Answer 6

Higher information content:

• TDABC identifies unused capacity (i.e. total used – practical capacity supplied)
• Is this unused capacity persistent (happens period on period)
• Some organisations require unused capacity (e.g. call centres)

How do you get better value out of this?

Question 7

4 advantages of TDABC

Answer 7

1. Higher information content - demonstrates excess and idle time
2. More realisitic (differentiates between practical and theoretical)
3. Clearly outlines time available and time required
4. Excess capacity can be identified and manged
   
   1. More efficient allocation of staff.

Question 8

3 disadvantages of TDABC

Answer 8

• adjusted when existing conditions change:
  
  • input prices change (salaries and operating expenses)
  • efficiency of the activity changes (learning curves, training programs and re-engineering processes)
  • time units change (new technology and processes).
• TDABC does not work well for complex businesses
  
  • Employees are surveyed to identify their percentage time, can be incorrect.
• Limitation: Assumes all time is the same.

Question 9

Limitations of TDABC

Answer 9

• Limited empirical evidence of the success of TDABC
• Standardised cost per time unit of capacity (to simplistic?)
  
  • Fails to capture the ‘value’ of time (each minute of costed time is assumed to be equal)
  • Differentiate the expertise (hence cost) of the employee in performing the activity
    
    • E.g. receptionist vs the accountant

Suitable where overhead costs lack homogeneity.